Ben Graves, CEO of Graves Hospitality Corp., has a diverse perspective on the hospitality industry. Graves operates nine hotels in the Twin Cities and several U.S. markets, plus has been an innovator in hotel food and beverage, with a history of operating destination standalone restaurants within and outside the company’s properties. Living in downtown Minneapolis, he has a unique perspective on the challenged local hotel scene and those of other markets where he does business (particularly Oakland, California, and Portland, Oregon).
I spoke to Graves early in the pandemic, as the industry was bailing water, and thought it would be interesting to revisit four years later (as with my recent conversation with St. Paul restaurateur Tim Niver).
The hotel industry received no specific pandemic assistance unlike peer businesses, restaurants, and music/theater venues, though facing similar catastrophic losses. Many in the industry believe Donald Trump’s status as a hotelier made the 2021 Congress unwilling to bail out hotels. The picture Graves paints today is of a localized business, where success is defined by market type rather than broader economic metrics. And as has been the case since 2020, our local market manifests unique challenges.
End of year reports by CBRE and Meet Minneapolis showed the city’s hotel industry lagging most Midwest markets in key occupancy and rate metrics. Average daily rates and occupancy had returned to pre-pandemic levels, but revenue per available room was not forecast to snap back until 2025.
TCB: You mentioned Minneapolis outperformed projections to see a 9% boost in revenue per available room last year, obviously a good thing, cough, Taylor Swift. Are there other signs of improvement in the local hotel market? Or are we still 25th of 25th in business metrics?
Ben Graves: Can I explain what’s happening nationally, first, to better understand what’s happening locally?
TCB: Sure.
BG: If we look at hospitality since beginning of Covid, everyone was initially in a world of hurt. People had stopped traveling. Then the first thing to come back was leisure travel. People were working remotely, they were pent-up, they wanted to go on a vacation. Initially it was US travel. They were afraid to go abroad. U.S. leisure destinations rebounded quickly.
TCB: I remember going to Phoenix in early fall ’21, usually a slow time, and paying spring break prices.
BG: Yes. [Our company has] hotels in leisure destinations that had some of their best years in ’21. OK, the next to come back was groups and events. Everything from weddings to business meetings. All these companies hadn’t held corporate functions for two or three years. They had to get their people together. Convention hotels started bouncing back. Then some cities started to come back with leisure travel. Nashville for example. But Minneapolis didn’t have much [demand] for leisure travel.
And lastly was business travel, road warriors, consultants, sales. Those people are now starting to travel, but it isn’t as much as it used to be. Last year was the first-time business travel departments started to be willing to renegotiate corporate contracts because our costs are up so much.
Most recently [in ’23], smaller companies in smaller markets like La Crosse and Racine, Wisconsin, resumed traveling, companies like Trane. It’s the Fortune 500s that haven’t come back yet, and those are the companies that dominate Minneapolis. We thought this diversity of Fortune 500s would insulate us, but it’s those companies that have become most proficient at remote work and meeting. They’re still traveling less.
As a whole, the hospitality industry reached pre-pandemic levels in late ’22. But in Minneapolis we remain way behind. Some of the bottom markets [nationally] are Minneapolis, Chicago, the [SFO] Bay Area, Portland [Oregon].
TCB: How about downtown Minneapolis specifically?
BG: Downtown hotels are surviving on sporting events, concerts, and entertainment. Our Moxy near US Bank Stadium is doing quite well. Our Residence Inn at 8th and LaSalle is doing OK with theatrical productions and their crews and performers, etc.
Downtown Minneapolis is a purpose-built place for large companies and commuters. Pre-2020, it was an office and entertainment environment. As of last November, 51.5% of commercial real estate in downtown was under water, not cash flowing for its debt. The closest city to that was Chicago at 19%. We’re 250% of any other city. That’s ominous. There are hotels for sale in downtown that are going to sell for pennies on the dollar. [Graves sold its Graves 601 Hotel to Loews in 2014 for $65 million, Loews invested an additional $18 million, and just sold the hotel for $23.5million, roughly a 75% discount.]
So we have a lot of heavy lifting to do. There’s positives in [Minneapolis] being the [national] epicenter for change, there’s a lot of pride in the city, but it’s gonna take a lot of work to make the core of Minneapolis successful again.
TCB: What thing would move the needle most?
BG: It’d be trying to reinvent a single-purpose downtown core. Diversify the 9 to 5 downtown. Many downtowns have an office tower next to a condo tower next to an entertainment complex and we don’t have that.
TCB: You’re not pinning a lot of hope on the corporate sector repopulating downtown.
BG: I think that will slowly come back.
TCB: It seems like a lot of hotels downscaled in the pandemic, service quality, amenities. They’re back to charging the same rates, but with a new diminished service model and they seem unapologetic about it. Are they trying to recoup losses?
BG: It was a combination of controlling expenses to come back after the pandemic. Our business is so fractioned, Adam. We don’t have lobbyists in government like airlines do, [most owners] have a handful of hotels, maybe one or 10 or 20. To activate change for this industry is more difficult. The airlines have successfully gotten people to check in on a device, pay for their seat well in advance, and be content without receiving a refund if they cancel. I think those are the kind of things [our industry] struggles with.
TCB: I heard someone suggest every hotel in downtown Minneapolis is losing six to seven figures annually.
BG: Well, we opened the Graves in 2004. In the Great Recession of 2008, downtown hotels couldn’t necessarily pay their loans, but they could cover operating costs. Since the pandemic there are markets where the EBITDA is not even cash positive. Hotels that came back quicker were the ones with lower operating costs and less [workers].
Hotels are also a real estate business. A lot of owners make money on [real estate] transactions. But we’re also operating overhead heavy. We’re capital expensive because we have a lot of employees. A full-service hotel might have one employee for every room, whereas a limited-service hotel might operate with 20 team members for 100 rooms.
Interest rates coming down would help a lot. [In hotels, mortgages] are not fixed like your house. You’re paying a variable interest rate. It’s up near 12% right now. It’s very difficult to make money.
TCB: Have labor costs gone up as dramatically as in restaurants?
BG: It’s gone up very dramatically. More so. It’s become harder to attract people. So you offer really great wages, really great benefits. You offer a great culture. Younger people want to be in an environment where they feel appreciated and have fun. That old top-down management school of fine hotels, that doesn’t cut it today.
TCB: Who’s doing well in this market?
BG: Since the pandemic, our InterContinental at the airport leads the market in [revenue per available room, a common industry metric].
TCB: Leads the entire Twin Cities?
BG: The Bloomington market is far and away the [healthiest] hotel market in the Twin Cities and we lead that market. Back when we started that hotel, we said we were going to try to compete with downtown Minneapolis, which led the market at the time. During the pandemic, that 100% flipped.
TCB: Did the industry receive any specialized help from the government other than what every other business was offered, PPP etc.?
BG: It’s crazy. Because of the factors I talked about, we didn’t get any of the restaurant or entertainment funding. We didn’t get the bailout the airlines got. It’s because we’re very fractioned, among other things.
TCB: Five to 10 years from now what does this industry look like? Will this crisis of debt and pandemic legacy change it?
BG: I still have high hopes for the industry. ‘Bleisure’ [travel] is a positive trend. [Combining work and vacation allows people to make longer stays and travel more often.] There will be more lifestyle hotels with good food and good cocktails. Some technology growth will change how you check in and interact with the hotel. The unique operators who are really good at delivering great service and guest experiences are going to win. Guests are looking for experiences. There will be commodity hotels, with a bed and a shower, and experience hotels. The hotels caught in the middle aren’t going to be as successful. That’s why people will pay more for our Moxy Hotel with a cool vibrant bar versus a hotel with the same amenities but no vibe, like a Fairfield Inn.
TCB: So it’s still a business where innovation distinguishes itself, it’s not a full-on commodity business like airlines?
BG: Exactly. And it’s still a business where everything in someone’s life can take place within the four walls of a hotel. That’s what makes it exciting, but also challenging.
